Context

Since 2014-15 when the NDA government came to power at the Centre, the nation’s per capita income has doubled to Rs 1.72 lakh.

India’s GDP doubles

According to National Statistics Office (NSO) data, the per capita income in terms of net national income, in current prices, stood at Rs 1,72,000 in 2022-23 with a growth rate of 15.8% over the previous year.
This would be nearly double ₹86,647 in 2014-15.
Per capita income at the current prices was estimated at Rs1,27,065 and Rs 1,48,524 respectively for the years 2020-21 and 2021-22.

This indicates that there has been a consistent rise in per capita income.

What is Per-Capita Income (PCI)?

The per capita income of a geographical location (say, a country, state, city, or others) measures the amount of money earned by every person in that area.
It determines the average income of a person in a country, a state, or a specific region.
This helps us evaluate the standard of livelihood and the quality of life of people in the geographical location.
It is calculated for an average per person and then expressed as a ratio.

Key parameters indicated by PCI

Average income: Per-capita income measures the average income earned per person in a particular geographic area. It provides an indication of the overall level of prosperity in the area.
Economic growth: Per-capita income is often used as an indicator of economic growth, as it reflects changes in the overall level of income earned by the population.
Standard of living: Higher PCI typically correspond to higher standards of living, as people are able to afford better healthcare, education, housing, and other essential goods and services.
Purchasing power: Per-capita income can be used to compare the relative purchasing power of different geographic areas.
Inflation-adjusted: Per-capita income is often reported in real terms, which takes into account inflation and provides a more accurate representation of purchasing power over time.
Income distribution: Per-capita income does not provide information about the distribution of income within a particular area. It is possible for an area to have a high per-capita income but still have significant income inequality.

How is Per Capita Income Calculated?

We use this formula to calculate the per capita income of a particular area.

PCI = Population’s total income / Population of a specific area

When you calculate the PCI of a country, you’ve to divide a country’s total income by that country’s total population.

The various uses of PCI are-
(1) Gross Domestic Product Per Capita
The GDP Per Capita calculates a country’s economic output by the number of people in that country. You have to divide a nation’s total economic domestic production by that nation’s population. The formula for calculating GDP Per Capita is:

GDP Per Capita = Gross Domestic Product/ Population

(2) Gross National Income Per Capita
To determine the Gross National Income per Capita, you have to take into account Gross Domestic Product Per Capita along with the value generated by the people of a country living abroad.

Other Uses

Per Capita Income is used to find out an area’s wealth or lack thereof.
It is also used to find out the affordability of an area regarding data on real estate prices.
Prominent business chains and owners consider an area’s per capita income before opening a store branch or shop in a concerned area.
The higher PCI of a place, the higher the chances of making considerable revenue.
The chances of profitable revenue fall drastically in those places where PCI is low.

What are the Limitations of Per Capita Income?

Despite being a commonly used measurement entity, per capita income comes with some limitations. Some of them are:

Sensitive to Outliers: When calculating a country’s PCI, every individual is taken into account. The calculation includes men, women, children, and babies. This is mainly because the measurement considers the entire country’s population or specific geographical location.
Inflation: Per Capita Income doesn’t count for an economy’s inflation (the rate of price rise). Inflation deducts the power of purchases of consumers and limits income increase. This results in overstating the average income of a place’s population.
International Comparisons: Making international comparisons can be unfair and inaccurate. This is because it does not include the currency exchange rate in the measurements while calculating the per capita income. Some economies are known to use non-monetary activity and barter systems. Again, this is not considered in calculations of the per capita income.
Distorted results: Per Capita Income includes non-earning individuals like children and even newborn babies. When a country’s average income is included, the babies or kids are counted even when they don’t add to the income. Those economies and countries with lots of children will, therefore, get a distorted result when using the PCI parameter to calculate an economy’s average income.
Savings are not accounted: The Per Capita Income calculations do not consider every individual’s savings. An individual could have a lot of wealth from his savings, which he uses to maintain a high quality of livelihood but earns a meagre income. Hence, the calculations will still count the wealthy person as a very low-income earner and decrease the per capita income.
Welfare parameters ignored: Per Capita Income is used to determine the living quality or livelihood in an area or geographical region. But the calculations do not count for quality of working conditions, literacy level, and overall health benefits.

Way forward

Look beyond just income inequality: While income inequality is an important indicator of economic health, it’s important to also consider other factors like the Gini Coefficient (a measure of income distribution) to get a more comprehensive understanding of the issues at hand. Over-focusing on income inequality alone can lead to a dependence on freebies and other short-term solutions.
Address the aspirations of young people: It’s important to invest in the development of skills and employment opportunities to provide young people with a clear path forward and to prevent them from being left behind in the economy.
Ensure equitable access to education and healthcare: Access to education and healthcare are critical components of ensuring that everyone has an equal opportunity to succeed. Investing in these areas can help promote social mobility and reduce inequality.
Focus on manufacturing and infrastructure: Manufacturing and infrastructure are key areas of economic growth and development, as they have a multiplier effect on the economy and can help distribute income more evenly. It’s important to invest in these areas to help promote equitable economic growth.
Diversify the economy: Dependence on any one sector of the economy can be risky, so it’s important to diversify the economy to reduce vulnerability to economic shocks. Diversifying away from agriculture and towards manufacturing and services can help promote equitable growth.
Invest in infrastructure: Investment in infrastructure, such as logistics, railways, and highways, can help reduce transportation costs and improve efficiency, promoting economic growth.
Reduce existing divides: Finally, it’s important to take proactive steps to reduce existing divides and promote social and economic equality. This can include measures like improving access to credit, reducing discrimination, and investing in social programs that benefit marginalized communities.